How to Use Real Estate Investing as a Future ATM

I enjoy investing in real estate. And I was recently on a podcast that asked me to describe how Selenid and I really view our real estate investing. My answer: we view our real estate as a future ATM.

This is not usually how we see it described however. So, let’s dig in a little bit. Because I think this has been a helpful perspective for us.

How real estate works for us as a future ATM

Real estate investing has served as a nice wealth accelerator for us.

When we started our financial plan, it essentially called for taking 1/3 of our savings rate and using it towards real estate investing. The other 2/3 went equally split towards paying off debt and investing in stocks/bonds.

From my most recent net worth update, however, you can see that real estate accounts for the majority of our net worth! It has grown at an exponential rate compared to our other wealth building strategies. Don’t get me wrong, I still believe in and practice a hybrid investing plan. But we can’t ignore that real estate has been a huge component of our success.

And the reason it has been so helpful for us is because of our investing philosophy and strategy.

How we analyze and buy properties

First and foremost is our strategy in how we identify good deals and buy our properties. The key is really analysis. I’d recommend you read this post on my analysis strategies first if you haven’t already.

But, I’ll give a quick recap as a refresher.

We invest in multifamily cash flowing rental investment properties using a Buy, Fix, Rent, and Hold model
To screen investment properties, I use the 1% rule (Monthly rent/Purchase price >/= 1%)
- If it meets criteria, I move forward to more analysis
- If it doesn’t meet criteria, I move on to another property
To analyze investment properties, I use cash-on-cash return (Annual Net Income/Money Out of Your Pocket >/= 10%)
- If it meets criteria, I lock up the property by placing an offer based on your criteria
- If it doesn’t meet criteria, I move on to another property
To valuate investment properties, I use NOI (Annual Income not including financing)
- Estimated Sale Price = NOI/X% (based on local market data, usually 8%)

Remember, you can download our free Cash Cow app on iPhone or Android here to help you analyze deals on the go!

By analyzing real estate deals in this fashion, we focus on cash flow. Both now, and in the future. And that aspect is important to remember, especially as we consider the role of real estate as a future ATM.

But before we go into that, let’s review all of the ways that real estate builds wealth because that will come into play…

How we make money from real estate

Cash flow only tells part of the story. Granted it is the most important part of the story. But there is more.

Remember, there are 4 additional ways that you make money in real estate:

Cash flow
Appreciation
Tax benefits
Principal pay down
Inflation hedge

However, appreciation (whether forced or market), tax benefits, principal pay down, and inflation hedge all generally take time to manifest. These are long term plays. And what makes the property worthwhile and profitable and wealth-building during that long term period? You guessed it! Cash flow.

(N.B. – One could argue that forced appreciation can be made to come quick and I don’t disagree. But time is still needed for rehab, renovation, and optimization of symptoms to create this appreciation. We can all agree it’s not immediate.)

That’s why we focus on cash flow and I want to emphasize cash flow in this post. That is what we base our analysis on. And cash flow from our rental properties is what have compounded over the years…you can see that in this breakdown of all of our properties and how their cash flow compounds…

How we use cash flow from real estate now

So that begs the question…now that we have this cash flow, how do we use it?

Well, we have a bunch of options. We could use the cash flow to:

Buy more real estate
Maintain our current real estate
Cover our normal life expenses, or
Any combination of the above

The reality is that it usually will be a combination of above. But most investors I think view building their real estate portfolio to cover their current expenses. But that’s not really how we view it.

We view our real estate income as largely available for use in buying more real estate and maintaining current properties. And the reason is that we view using that cash flow more in the future. Right now, I continue to work full time. So we don’t need the money now, even though we still use some of it monthly for extra payments to our primary home mortgage and for intentional buys like this swing set.

(Another N.B. – I work full time because I want to. Of course, if I was burned out or wanted to dial back, our real estate investing would allow me to do that. So this philosophy of viewing and using real estate as a future ATM assumes you are not investing to immediately leave medicine. In that case, you would immediately use the cash flow to cover expenses obviously.)

How we will use cash flow from real estate in the future

This is pretty simple to answer.

We will use our future real estate cash flow like an ATM. The cash flow will cover our living expenses and splurges like traveling. We will also use it to help pay for our kids’ college educations.

Real estate will be a huge component of financing our financial freedom and retirement, whether partial or total and whenever that actually happens.

How has this mindset impacted our real estate investing

Looking at real estate as a future ATM has had a significant and, I think, positive impact on our real estate investing.

First, it impacts our mindset. When we buy properties, we figure in how much rehab and renovation in the short and long term will cost. When we figure these numbers in, we do so knowing that we can use real estate cash flow to help fund them.

As a result, when something breaks down, like an old water heater, and we use monthly cash flow from our properties to replace it, we don’t get bummed out. We know those things were bound to happen and are happy to cover it from the real estate investing cash flow rather than our own pockets. And now, the property is set for the foreseeable future in terms of whatever particular issue we just repaired. Ultimately, the goal is to have each property in pretty good shape by the time we retire, and actually count on the cash flow for ourselves.

And let me tell you, this really helped us practically as well

One of the big mistakes we made getting started in real estate was underestimating capital expenditures or long-term repairs/renovations.

We are much better at this now. But cash flow from real estate gave us the cushion to absorb those initial cap ex expenses that we didn’t anticipate due to inexperience.

And that’s how cash flow, and a mindset of using real estate as a future ATM, really can give you leniency to make mistakes earlier in your experience. And that’s how you learn! I promise you will make mistakes when you get started. That’s just a part of it. The right mindset and cash flow gives you peace of mind when those mistakes do happen!

Lastly, investing in real estate as a future ATM helps you to buy more properties faster in good markets. Knowing you can use cash flow to finance repairs and renovations means that you don’t need to have that money saved up from personal accounts before buying.

That means that you can strike more easily and readily when the iron (market) is hot!